SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002.
Commission file number 0-27918
Century Aluminum Company
(Exact name of Registrant as specified in its Charter)
Delaware 13-3070826
(State of Incorporation) (IRS Employer Identification No.)
2511 Garden Road 93940
Building A, Suite 200 (Zip Code)
Monterey, California
(Address of principal executive offices)
Registrant's telephone number, including area code (831) 642-9300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
The registrant had 20,554,302 shares of common stock outstanding at June
30, 2002.
CENTURY ALUMINUM COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
June 30, December 31,
2002 2001
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents ....................................................... $ 20,183 $ 13,388
Accounts receivable, trade - net ................................................ 50,075 48,710
Due from affiliates ............................................................. 18,000 19,767
Inventories ..................................................................... 75,548 75,217
Prepaid and other assets ........................................................ 7,471 3,573
------------ ------------
Total current assets ...................................................... 171,277 160,655
Property, Plant and Equipment - net ................................................... 425,440 426,006
Intangible Asset - net ................................................................ 132,873 146,002
Due from Affiliates - Less current portion ............................................ 3,544 8,364
Other Assets .......................................................................... 35,157 35,679
------------ ------------
Total ..................................................................... $ 768,291 $ 776,706
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade ......................................................... $ 40,930 $ 42,394
Due to affiliates ............................................................... 15,233 2,201
Industrial revenue bonds ........................................................ 7,815 7,815
Accrued and other current liabilities ........................................... 32,381 34,065
Accrued employee benefits costs - current portion ............................... 8,287 7,800
------------ ------------
Total current liabilities ................................................. 104,646 94,275
------------ ------------
Long Term Debt - net .................................................................. 321,643 321,446
Accrued Pension Benefits Costs - Less current portion ................................. 5,522 4,017
Accrued Postretirement Benefits Costs - Less current portion .......................... 68,378 65,627
Other Liabilities ..................................................................... 8,580 10,697
Deferred Taxes ........................................................................ 33,206 39,542
------------ ------------
Total noncurrent liabilities .............................................. 437,329 441,329
------------ ------------
Minority Interest ..................................................................... 21,292 23,917
Contingencies and Commitments (See Note 5)
Shareholders' Equity:
Convertible preferred stock (8.0% cumulative, 500,000 shares outstanding) ....... 25,000 25,000
Common stock (one cent par value, 50,000,000 shares authorized;
20,554,302 and 20,513,287 shares outstanding at June 30, 2002 and
December 31, 2001, respectively) ............................................. 206 205
Additional paid-in capital ...................................................... 168,958 168,414
Accumulated other comprehensive income .......................................... 5,177 6,752
Retained earnings ............................................................... 5,683 16,814
------------ ------------
Total shareholders' equity ................................................ 205,024 217,185
------------ ------------
Total ..................................................................... $ 768,291 $ 776,706
============ ============
See notes to consolidated financial statements
1
CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
----------------------- -----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
NET SALES:
Third-party customers .............................. $ 148,377 $ 159,128 $ 302,576 $ 243,218
Related parties .................................... 31,959 29,791 56,860 56,391
--------- --------- --------- ---------
180,336 188,919 359,436 299,609
Cost of Goods Sold ..................................... 175,380 175,154 347,172 277,424
--------- --------- --------- ---------
Gross Profit ........................................... 4,956 13,765 12,264 22,185
Selling, General and Administrative Expenses ........... 3,761 2,813 7,938 6,362
--------- --------- --------- ---------
Operating Income ....................................... 1,195 10,952 4,326 15,823
Interest Expense ....................................... (9,896) (10,774) (20,155) (10,540)
Interest Income ........................................ 58 433 129 549
Other Income (Expense) ................................. (132) 60 (102) (61)
Net Loss on Forward Contracts .......................... -- -- -- (176)
--------- --------- --------- ---------
Income (Loss) Before Income Taxes and Minority
Interest ........................................... (8,775) 671 (15,802) 5,595
Income Tax Benefit (Expense) ........................... 2,862 (634) 5,108 (2,407)
--------- --------- --------- ---------
Net Income (Loss) Before Minority Interest ............. (5,913) 37 (10,694) 3,188
Minority Interest ...................................... 1,313 1,306 2,626 1,306
--------- --------- --------- ---------
Net Income (Loss) ...................................... (4,600) 1,343 (8,068) 4,494
Preferred Dividends .................................... (500) (500) (1,000) (500)
--------- --------- --------- ---------
Net Income (Loss) Available to Common Shareholders ..... $ (5,100) $ 843 $ (9,068) $ 3,994
========= ========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE:
Basic .............................................. $ (0.25) $ 0.04 $ (0.44) $ 0.20
Diluted ............................................ $ (0.25) $ 0.04 $ (0.44) $ 0.19
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic .............................................. 20,554 20,502 20,554 20,431
========= ========= ========= =========
Diluted ............................................ 20,554 20,651 20,544 20,528
========= ========= ========= =========
DIVIDENDS PER COMMON SHARE ............................. $ 0.05 $ 0.05 $ 0.10 $ 0.10
========= ========= ========= =========
See notes to consolidated financial statements
2
CENTURY ALUMINUM COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six months ended
June 30,
-------------------------
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................ $ (8,068) $ 4,494
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization .............................. 28,157 16,694
Deferred income taxes ...................................... (5,201) 2,685
Pension and other postretirement benefits .................. 4,743 3,450
Inventory market adjustment ................................ (756) 265
Loss on disposal of assets ................................. 459 --
Minority Interest .......................................... (2,625) (1,307)
Change in operating assets and liabilities:
Accounts receivable, trade - net ..................... (1,711) (6,380)
Due from affiliates .................................. 2,595 2,683
Inventories .......................................... 425 3,963
Prepaids and other assets ............................ (2,724) 2,835
Accounts payable, trade .............................. (1,464) (9,438)
Due to affiliates .................................... 7,397 (1,495)
Accrued and other current liabilities ................ (105) 6,131
Other - net .......................................... (917) 509
---------- ----------
Net cash provided by operating activities .................. 20,205 25,089
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ........................ (10,852) (5,641)
Proceeds from sale of property, plant and equipment .............. -- 22
Divestitures ..................................................... -- 98,971
Acquisitions ..................................................... -- (464,176)
---------- ----------
Net cash used in investing activities ...................... (10,852) (370,824)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings ....................................................... -- 321,250
Financing fees ................................................... -- (15,440)
Dividends ........................................................ (2,563) (2,684)
Issuance of common or preferred stock ............................ 5 25,000
---------- ----------
Net cash provided by (used in) financing activities ........ (2,558) 328,126
---------- ----------
NET INCREASE (DECREASE) IN CASH ..................................... 6,795 (17,609)
CASH, BEGINNING OF PERIOD ........................................... 13,388 32,962
---------- ----------
CASH, END OF PERIOD ................................................. $ 20,183 $ 15,353
========== ==========
See notes to consolidated financial statements
3
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Six Month Periods Ended June 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
1. General
The accompanying unaudited interim consolidated financial statements of
the Company should be read in conjunction with the audited consolidated
financial statements for the year ended December 31, 2001. In management's
opinion, the unaudited interim consolidated financial statements reflect all
adjustments, which are of a normal and recurring nature and which are necessary
for a fair presentation, in all material respects, of financial results for the
interim periods presented. Operating results for the first six months of 2002
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2002. Certain reclassifications of 2001 information were
made to conform to the 2002 presentation.
2. Inventories
Inventories consist of the following:
June 30, December 31,
2002 2001
------------ ------------
Raw materials .................. $ 39,492 $ 36,686
Work-in-process ................ 10,755 11,911
Finished goods ................. 8,323 11,219
Operating and other supplies ... 16,978 15,401
------------ ------------
$ 75,548 $ 75,217
============ ============
At June 30, 2002 and December 31, 2001, approximately 76% and 79% of
inventories were valued at the lower of last-in, first-out ("LIFO") cost or
market, respectively. The excess of LIFO cost (or market, if lower) over
first-in, first-out ("FIFO") cost was approximately $719 at June 30, 2002. The
excess of FIFO cost over LIFO cost (or market, if lower) of inventory was
approximately $3,374 at December 31, 2001.
3. Intangible Asset
The intangible asset consists of the power contract acquired in connection
with the Company's acquisition of an aluminum reduction facility located in
Hawesville, Kentucky in April 2001. The contract value is being amortized over
its term (ten years) using a method that results in annual amortization equal to
the expected annual benefits. As of June 30, 2002, the gross carrying amount of
the intangible asset was $165,696 with accumulated amortization of $32,823. For
the three month and six month periods ended June 30, 2002, amortization expense
for the intangible asset totaled $6,565 and $13,129, respectively. For the year
ended December 31, 2002, estimated aggregate amortization expense for the
intangible asset will be $26,258.
4
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Six Month Periods Ended June 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
Estimated Amortization Expense:
-------------------------------
For the year ended 12/31/03.................... $ 19,710
For the year ended 12/31/04.................... 12,448
For the year ended 12/31/05.................... 14,600
For the year ended 12/31/06.................... 12,914
For the year ended 12/31/07.................... 13,686
4. Debt
Effective April 1, 2001, in connection with its acquisition of the
Hawesville facility, the Company issued and sold $325,000 of its 11 3/4% senior
secured first mortgage notes due 2008 (the "Notes") to certain institutional
investors in a private placement under Rule 144A of the Securities Act of 1933.
Payment obligations under the Notes are unconditionally guaranteed by all of the
Company's material wholly owned direct and indirect subsidiaries (the "Guarantor
Subsidiaries") and secured by mortgages and security interests granted by two of
the Company's subsidiaries in all of their respective interests in the real
property, plant and equipment comprising the Hawesville and Ravenswood
facilities. The Company had unamortized bond discounts on the Notes of $3,357
and $3,554 at June 30, 2002 and December 31, 2001, respectively. The indenture
governing the Notes contains customary covenants including limiting the
Company's ability to pay dividends, incur debt, make investments, sell assets or
stock of certain subsidiaries, and purchase or redeem capital stock. If the
Company does not generate sufficient cumulative earnings, as defined in the
Company's loan agreements, it would be required to suspend dividend
distributions on or before 2003. As of June 30, 2002, $5.2 million of retained
earnings was available for payment of dividends. The Note guarantees rank
equally in right of payment to the other senior indebtedness of the guarantors
and senior in right of payment to all subordinated indebtedness of the
guarantors.
In November 2001, the Company exchanged the Notes for a like principal
amount of 11 3/4% senior secured first mortgage notes due 2008 (the "Exchange
Notes"), which are registered under the Securities Act of 1933. The terms of the
Exchange Notes are substantially similar to the Notes, except the Exchange Notes
do not have the transfer restrictions and registration rights relating to the
Notes. The Exchange Notes are not listed on any securities exchange or included
in any automated quotation system.
Effective April 1, 2001, the Company entered into a $100,000 senior
secured revolving credit facility (the "Revolving Credit Facility") with a
syndicate of banks. The Revolving Credit Facility may be used for working
capital needs, capital expenditures and other general corporate purposes.
Borrowings under the Revolving Credit Facility are subject to a $30,000 reserve
and limited to a borrowing base based upon certain eligible inventory and
receivables. The Company is subject to customary covenants, including
restrictions on capital expenditures, additional indebtedness, liens,
guarantees, mergers and acquisitions, dividends, distributions, capital
redemptions and investments. The Company's obligations under the Revolving
Credit Facility are unconditionally guaranteed by its domestic subsidiaries
(other than Century Aluminum of Kentucky, LLC ("LLC")) and secured by a first
priority security interest in all accounts receivable and inventory belonging to
the Company
5
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Six Month Periods Ended June 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
and its subsidiary borrowers. Amounts outstanding under the Revolving Credit
Facility bear interest, at the Company's option, at either a floating LIBOR rate
or Fleet National Bank's base rate, in each case plus an applicable interest
margin. The applicable interest margin ranges from 2.25% to 3.0% over the LIBOR
rate and 0.75% to 1.5% over the base rate and is determined by certain financial
measurements of the Company. The Revolving Credit Facility will mature on April
2, 2006. There were no outstanding borrowings under the Revolving Credit
Facility as of June 30, 2002.
Effective April 1, 2001, in connection with its acquisition of the
Hawesville facility, the Company assumed industrial revenue bonds ("IRBs") in
the aggregate principal amount of $7,815. An affiliate of Glencore International
AG, the Company's largest shareholder (together with its subsidiaries,
"Glencore"), effectively purchased a 20% interest in the Hawesville facility
from the Company on April 1, 2001. Under the terms of the agreement governing
the sale, Glencore agreed to assume a pro rata portion of that debt and to pay a
pro rata portion of service costs of the IRBs through its investment in the
Hawesville facility. The IRBs mature on April 1, 2028, are secured by a Glencore
letter of credit and bear interest at a variable rate not to exceed 12% per
annum determined weekly based on prevailing rates for similar bonds in the bond
market. The interest rate on the IRBs at June 30, 2002 was 1.55%. Interest is
paid quarterly. The IRBs are classified as current liabilities because they are
remarketed weekly and could be required to be repaid upon demand if there is a
failed remarketing, as provided in the indenture governing the IRBs.
5. Contingencies and Commitments
Environmental Contingencies
The Company spends significant amounts to comply with environmental laws
and to assure compliance with known and anticipated requirements. The Company
believes it does not have environmental liabilities that are likely to have a
material adverse effect on the Company. However, there can be no assurance that
future requirements at currently or formerly owned properties will not result in
liabilities which may have a material adverse effect on the Company's financial
condition, results of operations or liquidity.
Century of West Virginia is performing certain remedial measures at its
Ravenswood Facility pursuant to a RCRA 3008(h) order issued by the Environmental
Protection Agency ("EPA") in 1994 (the "3008(h) Order"). Century of West
Virginia also conducted a RCRA facility investigation ("RFI") evaluating other
areas at Ravenswood that may have contamination requiring remediation. The RFI
was submitted to the EPA in December 1999. Century of West Virginia, in
consultation with the EPA, is carrying out interim remediation measures at two
sites identified in the RFI. The Company expects work on these two sites will be
complete by the end of 2002 and that the EPA will not require further work as a
result of the RFI. The Company believes a significant portion of the
contamination on the two identified sites is attributable to the operations of
Kaiser Aluminum and Chemical ("Kaiser"), the prior owner, and will be the
financial responsibility of that owner, as discussed below.
Kaiser owned and operated the Ravenswood Facility for approximately 30
years before Century of West Virginia purchased it. Many of the conditions that
Century of West Virginia is remedying exist because of activities that occurred
during Kaiser's ownership and operation. Under the terms of the
6
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Six Month Periods Ended June 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
Company's agreement to purchase the Ravenswood Facility ("Kaiser Purchase
Agreement"), Kaiser retained the responsibility to pay the costs of cleanup of
those conditions. In addition, Kaiser retained title to certain land within the
Ravenswood premises and is responsible for those areas. On February 12, 2002,
Kaiser and certain of its wholly owned subsidiaries filed voluntary petitions
under Chapter 11 of the Federal Bankruptcy Code ("Kaiser Bankruptcy"). While the
Company believes the Kaiser Bankruptcy will not relieve Kaiser of its
obligations to do remediation work under government orders, the ultimate outcome
of the Kaiser Bankruptcy is uncertain. Nevertheless, the Company does not expect
the Kaiser Bankruptcy to have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
Under the terms of the agreement to sell its fabricating businesses to
Pechiney (the "Pechiney Agreement"), the Company and Century of West Virginia
provided Pechiney with certain indemnifications. Those include the assignment of
certain of Century of West Virginia's indemnification rights under the Kaiser
Purchase Agreement (with respect to the real property transferred to Pechiney)
and the Company's indemnification rights under its stock purchase agreement with
Alcoa relating to the Company's purchase of Century Cast Plate, Inc. The
Pechiney Agreement provides further indemnifications, which are limited, in
general, to pre-closing conditions that were not disclosed to Pechiney and to
off-site migration of hazardous substances from pre-closing acts or omissions of
Century of West Virginia. Environmental indemnifications under the Pechiney
Agreement expire September 20, 2005 and are payable only to the extent they
exceed $2,000.
The Hawesville Facility has been listed on the National Priorities List
under the federal Comprehensive Environmental Response, Compensation and
Liability Act. On July 6, 2000, the EPA issued a final Record of Decision
("ROD") which details response actions to be implemented at several locations at
the Hawesville site to address actual or threatened releases of hazardous
substances. Those actions include:
o removal and off-site disposal at approved landfills of certain soils
contaminated by polychlorinated biphenyls ("PCBs");
o management and containment of soils and sediments with low PCB
contamination in certain areas on-site; and
o the continued extraction and treatment of cyanide contaminated
ground water using the existing ground water treatment system.
The total costs for the remedial actions to be undertaken and paid for by
Southwire relative to this site are estimated under the ROD to be $12,600 and
the forecast of annual operating and maintenance costs is $1,200. Under the
Company's agreement with Southwire to purchase the Hawesville facility,
Southwire indemnified the Company against all on-site environmental liabilities
known to exist prior to the closing of the acquisition, including all
remediation, operation and maintenance obligations under the ROD. On behalf of
Southwire, Century will operate and maintain the ground water treatment system
required under the ROD. Southwire will reimburse Century for any such expense
that exceeds $400 annually. Under the terms of the Company's agreements with
Glencore relating to
7
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Six Month Periods Ended June 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
the Company's ownership and operation of the Hawesville Facility, Glencore will
share pro rata in any environmental costs (net of any amounts available under
the indemnity provisions in the Company's stock purchase agreement with
Southwire) associated with the Hawesville facility.
If on-site environmental liabilities relating to Southwire's pre-closing
activities at the Hawesville facility were not known to exist as of the date of
the closing of the acquisition, but become known within six years after the
closing, the Company and Glencore, based on each company's respective percentage
interests in the Hawesville Facility, will share the costs of remedial action
with Southwire on a sliding scale depending on the year the claim is brought.
Any on-site environmental liabilities arising from pre-closing activities which
do not become known until on or after the sixth anniversary of the closing of
the acquisition of the Hawesville facility will be the responsibility of
Glencore and the Company. In addition, the Company and Glencore will be
responsible for a pro rata portion of any post-closing environmental costs which
result from a change in environmental laws after the closing or from their own
activities, including a change in the use of the facility.
Century acquired the Hawesville facility by purchasing all the outstanding
equity securities of Metalsco Ltd., which owns a direct 1% partnership interest
in NSA, Ltd. ("NSA") and an indirect 99% partnership interest in NSA through its
wholly-owned subsidiary, Skyliner, Inc. NSA is the Kentucky limited partnership
which owns the assets comprising the Hawesville facility. Metalsco previously
owned certain assets which are unrelated to NSA, including the stock of Gaston
Copper Recycling Corporation ("Gaston"), a secondary metals reduction facility
in South Carolina. Gaston has numerous liabilities related to environmental
conditions at its reduction facility. Gaston and all other non-NSA assets owned
at any time by Metalsco were identified in the Company's agreement with
Southwire as unwanted property and were distributed to Southwire prior to the
closing of the Hawesville acquisition. Southwire indemnified the Company for all
liabilities related to the unwanted property. Southwire also retained ownership
of certain land adjacent to the Hawesville Facility containing NSA's former
potliner disposal areas, which are the sources of cyanide contamination in the
facility's groundwater. Southwire retained full responsibility for this land,
which was never owned by Metalsco and is located on the north boundary of the
Hawesville site. In addition, Southwire indemnified the Company against all
risks associated with off-site hazardous material disposals by NSA which
pre-date the closing of the acquisition.
Under the terms of the Company's agreement to purchase the Hawesville
facility, Southwire secured its indemnity obligations for environmental
liabilities for seven years after the closing by posting a $15,000 letter of
credit issued in the Company's favor, with an additional $15,000 to be posted if
Southwire's net worth drops below a pre-determined level during that period. The
Company's indemnity rights under the agreement are shared pro rata with
Glencore. The amount of security Southwire provides may increase (but not above
$15,000 or $30,000, as applicable) or decrease (but not below $3,000) if certain
specified conditions are met. The Company cannot be certain that Southwire will
be able to meet its indemnity obligations. In that event, under certain
environmental laws which impose liability regardless of fault, the Company may
be liable for any outstanding remedial measures required under the ROD and for
certain liabilities related to the unwanted properties. If Southwire fails to
meet its indemnity obligations or if the Company's shared or assumed liability
is significantly greater than anticipated, the Company's financial condition,
results of operations and liquidity could be materially adversely affected.
8
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Six Month Periods Ended June 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
The Company, together with all other past and present owners of an alumina
facility at St. Croix, Virgin Islands, has entered into an Administrative Order
on Consent with the Environmental Protection Agency (the "Order") pursuant to
which the signatories have agreed to carry out a Hydrocarbon Recovery Plan to
remove and manage oil floating on top of groundwater underlying the facility.
Recovered hydrocarbons and groundwater will be delivered to the adjacent
petroleum refinery where they will be received and managed. The owner of the
petroleum refinery will compensate the other signatories by paying them the fair
market value for the petroleum recovered. Lockheed Martin Corporation
("Lockheed"), which sold the facility to one of the Company's affiliates, Virgin
Islands Alumina Corporation ("Vialco"), in 1989, has tendered indemnity and
defense of this matter to Vialco pursuant to terms of the Lockheed-Vialco Asset
Purchase Agreement. The Company also gave certain environmental indemnity rights
to St. Croix Alumina, LLC ("St. Croix"), an indirect affiliate of Alcoa, Inc.,
when it sold the facility to St. Croix. Those rights extend only to
environmental conditions arising from Vialco's operation of the facility and
then only after St. Croix has spent $300 on such conditions. Vialco's
indemnification obligation to St. Croix expired on July 24, 2001. Management
does not believe Vialco's liability under this Order or its indemnification
obligation to St. Croix, if any, will have a material adverse effect on the
Company's financial condition, results of operations, or liquidity.
It is the Company's policy to accrue for costs associated with
environmental assessments and remedial efforts when it becomes probable that a
liability has been incurred and the costs can be reasonably estimated. The
aggregate environmental related accrued liabilities were $1,964 and $1,800 at
June 30, 2002 and December 31, 2001, respectively. All accruals have been
recorded without giving effect to any possible recoveries. With respect to
ongoing environmental compliance costs, including maintenance and monitoring,
such costs are expensed as incurred.
Because of the issues and uncertainties described above, and the Company's
inability to predict the requirements of the future environmental laws, there
can be no assurance that future capital expenditures and costs for environmental
compliance will not have a material adverse effect on the Company's future
financial condition, results of operations, or liquidity. Based upon all
available information, management does not believe that the outcome of these
environmental matters, or environmental matters concerning Mt. Holly, will have
a material adverse effect on the Company's financial condition, results of
operations, or liquidity.
Legal Contingencies
The Company has pending against it or may be subject to various other
lawsuits, claims and proceedings related primarily to employment, commercial,
environmental and safety and health matters. Although it is not presently
possible to determine the outcome of these matters, management believes their
ultimate disposition will not have a material adverse effect on the Company's
financial condition, results of operations, or liquidity.
Other Contingency
Pechiney Rolled Products, Inc., Century of West Virginia's principal
customer, has publicly announced it is experiencing financial losses and that it
is considering various alternatives to address its losses, including
restructuring. If a restructuring should be undertaken, it could have a material
adverse effect on the Company. No provision for loss has been made because a
loss is not probable.
9
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Six Month Periods Ended June 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
Power Commitments
The Company purchases all of the electricity requirements for the
Ravenswood Facility from Ohio Power Company, a unit of American Electric Power
Company, pursuant to a fixed price power supply agreement. That agreement
expires on July 31, 2003. On May 3, 2002, the Company signed a new contract to
purchase electric power for its Ravenswood facility from Ohio Power. The new
agreement is effective August 1, 2003, when the Company's current power contract
with Ohio Power expires. The new contract will provide power for the Ravenswood
facility at competitive rates under a GS-4 schedule approved by the Public
Utilities Commission of Ohio. The GS-4 schedule is due to expire on December 31,
2005.
The Hawesville facility currently purchases all of its power from Kenergy
Corporation at fixed prices. Approximately 14% of the Hawesville facility's
power requirements are unpriced in calendar years 2003 through 2005. The
unpriced portion of the contract increases to approximately 26% in 2006. On June
26, 2002, the Company entered into a fixed price power supply agreement for the
14% of the power that was unpriced for calendar year 2003.
The Company is subject to losses associated with equipment shutdowns,
caused by the loss or interruption of electrical power, as well as by labor
shortages and catastrophic events. Power interruptions may have a material
adverse effect on the Company's business because it uses large amounts of
electricity in the primary aluminum production process. Any loss of power which
causes an equipment shutdown can result in the hardening or "freezing" of molten
aluminum in the pots where it is produced. If this occurs, significant losses
can occur if the pots are damaged and require repair or replacement, a process
that could limit or shut down the Company's production operations for a
significant period of time. Certain shutdowns not covered by insurance could be
a default under the Revolving Credit Facility. No assurance can be given that a
material shutdown will not occur in the future or that such a shutdown would not
have a material adverse effect on the Company.
Although the Company maintains property damage insurance to provide for
the repair or replacement of damaged equipment or property, as well as business
interruption insurance to mitigate losses resulting from any equipment failure
or production shutdown caused by a catastrophic event, the Company may still be
required to pay significant amounts under the deductible provisions of those
insurance policies. In addition, coverage may not be sufficient to cover all
losses which result from a catastrophic event. Furthermore, Century maintains
insurance to cover losses resulting from damage to the Company's power
suppliers' facilities, or transmission lines that would cause an interruption of
the power supply to the Company's facilities. This insurance contains large
deductibles and self-insured amounts and does not cover losses resulting from a
power loss due solely to lack of sufficient electrical power resulting from
unusually high usage in the regions. Century renewed its property and business
interruption insurance policies in
10
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Six Month Periods Ended June 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
April 2002 for one year. As expected, premiums increased significantly in the
aftermath of September 11 and the policies contain much higher deductibles and
self-insured amounts.
Labor Commitments
Century of West Virginia's hourly employees, which comprise 39% of the
Company's workforce, are represented by the USWA and are currently working under
a four-year labor agreement that would have expired May 31, 2003. On March 8,
2002, the labor agreement was extended through May 31, 2006.
6. Forward Delivery Contracts and Financial Instruments
As a producer of primary aluminum products, the Company is exposed to
fluctuating raw material and primary aluminum prices. The Company routinely
enters into fixed and market priced contracts for the sale of primary aluminum
and the purchase of raw materials in future periods.
In connection with the sale of its aluminum fabricating businesses to
Pechiney in September 1999, the Company entered into a Molten Aluminum Purchase
Agreement (the "Pechiney Metal Agreement") with Pechiney that expires December
31, 2005 with provisions for extension. Pursuant to the Pechiney Metal
Agreement, Pechiney purchases, on a monthly basis, at least 23.0 million pounds
and no more than 27.0 million pounds of molten aluminum at a variable price
determined by reference to the U.S. Midwest Market Price.
Concurrent with the Company's purchase of an additional 23% interest in
the Mt. Holly facility from Xstrata, effective April 1, 2000, the Company
entered into a ten-year agreement with Glencore (the "Glencore Metal Agreement")
to sell approximately 110.0 million pounds of primary aluminum products per
year. Selling prices of the Glencore Metal Agreement through December 31, 2001
were determined by a market-based formula while the remaining eight years are at
a fixed price defined in the agreement.
In connection with the acquisition of the Hawesville facility in April
2001, the Company entered into a 10-year contract with Southwire (the "Southwire
Metal Agreement") to supply 240 million pounds of high-purity molten aluminum
annually to Southwire's wire and cable manufacturing facility located adjacent
to the Hawesville facility. Under this contract, Southwire will also purchase 60
million pounds of standard grade molten aluminum each year for the first five
years of the contract, with an option to purchase an equal amount in each of the
remaining five years. The Company and Glencore will each be responsible for
providing a pro rata portion of the aluminum supplied to Southwire under this
contract. The price for the molten aluminum to be delivered to Southwire from
the Hawesville facility is variable and will be determined by reference to the
U.S. Midwest Market Price. This agreement expires on December 31, 2010, and will
automatically renew for additional five-year terms, unless either party provides
12 months notice that it has elected not to renew.
11
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Six Month Periods Ended June 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
Apart from the Pechiney Metal Agreement, Glencore Metal Agreement and
Southwire Metal Agreement, the Company had forward delivery contracts to sell
332.8 million pounds and 377.1 million pounds of primary aluminum at June 30,
2002 and December 31, 2001, respectively. Of these forward delivery contracts,
4.6 million pounds and 25.5 million pounds at June 30, 2002 and December 31,
2001, respectively, were with the Glencore Group.
The Company was party to a long-term supply agreement with Alcoa to
purchase alumina through the end of 2006. That contract was unpriced from 2002
through 2006. The Company negotiated pricing with both Alcoa and Glencore which
resulted in a more competitive agreement with Glencore. The new long-term supply
agreements with Glencore, which replaced the Alcoa alumina agreement, will
extend through 2006. These new agreements provide that Glencore will supply a
fixed quantity of alumina at prices determined by a market-based formula. In
addition, as part of its acquisition of an additional 23% interest in the Mt.
Holly facility, the Company assumed an alumina supply agreement with Glencore
for its alumina requirements relative to the additional interest. This agreement
terminates in 2008 and is priced with a market-based formula. As part of its
acquisition of the Hawesville facility, the Company assumed an alumina supply
agreement with Kaiser. That agreement expires in 2005 and is a variable-priced
market-based contract. The Company has received assurances from Kaiser
management that, despite the Kaiser Bankruptcy, Kaiser will continue to perform
under this alumina supply agreement, and the Company is seeking to have the
contract assumed through the bankruptcy process, although there can be no
assurance the Company will be successful.
To mitigate the volatility in its market priced forward delivery
contracts, the Company enters into fixed price financial sales contracts, which
settle in cash in the period corresponding to the intended delivery dates of the
forward delivery contracts. At June 30, 2002 and December 31, 2001, the Company
had financial instruments, primarily with the Glencore Group, for 207.5 million
pounds and 248.8 million pounds, respectively. These financial instruments are
scheduled for settlement at various dates in 2002 through 2003. The Company had
no fixed price financial purchase contracts to purchase aluminum at June 30,
2002. Additionally, to mitigate the volatility of the natural gas markets, the
Company enters into fixed price financial purchase contracts, which settle in
cash in the period corresponding to the intended usage of natural gas. At June
30, 2002 and December 31, 2001, the Company had financial instruments for 2.3
million and 3.1 million DTH (one decatherm is equivalent to one million British
Thermal Units), respectively. These financial instruments are scheduled for
settlement at various dates in 2002 through 2005. Based on the fair value of the
Company's financial instruments as of June 30, 2002, accumulated other
comprehensive income of $3,111 is expected to be reclassified to earnings over
the next twelve month period.
The forward financial sales and purchase contracts are subject to the risk
of non-performance by the counterparties. However, the Company only enters into
forward financial contracts with counterparties it determines to be
creditworthy. If any counterparty failed to perform according to the terms of
the contract, the accounting impact would be limited to the difference between
the nominal value of the contract and the market value on the date of
settlement.
12
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Six Month Periods Ended June 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
7. Supplemental Cash Flow Information
Six Months Ended
June 30,
--------------------
2002 2001
-------- --------
Cash paid for:
Interest ............................... $ 18,571 $ 1
Income taxes ........................... -- 382
Cash received for:
Interest ............................... 129 549
Income tax refunds ..................... $ 110 $ 30
8. Acquisitions
Effective April 1, 2001, the Company completed the acquisition of the
Hawesville facility. The following table represents the unaudited pro forma
results of operations for the six months ended June 30, 2001 assuming the
acquisition occurred on January 1, 2001. The unaudited pro forma amounts may not
be indicative of the results that actually would have occurred if the
transactions described above had been completed and in effect for the periods
indicated or the results that may be obtained in the future.
Six months ended
June 30,
2001
----------------
(unaudited)
Net sales...................................... $385,533
Net income..................................... 3,769
Net income available to common shareholders.... 2,769
Earnings per share............................. $ 0.14
9. New Accounting Standards
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS
No. 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
Effective January 1, 2002, the Company adopted SFAS No. 141. There have been no
business acquisitions since the effective date of SFAS No. 141.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which became effective January 1, 2002. SFAS No. 142 requires, among
other things, the discontinuance of goodwill amortization. In addition, SFAS No.
142 includes provisions for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing
13
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Six Month Periods Ended June 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the identification of reporting units for
purposes of assessing potential future impairments of goodwill. SFAS No. 142
also requires the Company to complete a transitional goodwill impairment test
six months from the date of adoption. There was no impact on the Company's
Balance Sheet or Statement of Operations from the adoption of SFAS No. 142
because there was no goodwill subject to the impairment test.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment
or Disposal of Long Lived Assets." Effective January 1, 2002, the Company
adopted SFAS No. 144. This statement addresses financial accounting and
reporting for the impairment and disposal of long-lived assets. The provisions
of this standard are generally to be applied prospectively.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This Statement establishes standards for accounting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard is required to be adopted by the
Company beginning January 1, 2003. The Company is currently assessing the
details of this standard and is developing a plan for implementation.
10. Comprehensive Income
Six months ended
June 30,
2002 2001
---------------------
Net Income (Loss) ..................................................... $ (8,068) $ 4,494
Other Comprehensive Income (Loss):
Net unrealized gain (loss) on financial instruments, net of tax
of ($60) and ($1,108), respectively ............................... 49 2,125
Net amount reclassified as income, net of tax of ($893) and $0,
respectively ...................................................... (1,624) --
-------- --------
Comprehensive Income (Loss) ........................................... $ (9,643) $ 6,619
======== ========
11. Consolidating Condensed Financial Information
The Company's 11 3/4% Senior Secured First Mortgage Notes due 2008 are
jointly and severally and fully and unconditionally guaranteed by all of the
Company's material wholly owned direct and indirect subsidiaries (the "Guarantor
Subsidiaries"). Condensed consolidating financial information was not provided
for the periods prior to the acquisition because: (i) Century Aluminum Company
has no independent assets or operations, (ii) the guarantees are full and
unconditional and joint and several, and (iii) for those periods, any
subsidiaries of the Company other than the subsidiary guarantors were minor. As
of June 30, 2002, as a result of the acquisition of the
14
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Six Month Periods Ended June 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
Hawesville facility, Century indirectly holds an 80% equity interest in Century
Aluminum of Kentucky, LLC ("LLC") and as such consolidates 100% of the assets,
liabilities and operations of the LLC into its financial statements, showing the
interest of the 20% owners as "Minority Interest". LLC (the "Non-Guarantor
Subsidiary") has not guaranteed the Exchange Notes, and the Company has not
caused its indirect equity interests in the LLC to be pledged as collateral for
the Exchange Notes. The Company's interest in the Mt. Holly facility's property,
plant and equipment has not been pledged as collateral. Other subsidiaries of
the Company which are immaterial will not guarantee the Exchange Notes
(collectively, the "Non-Guarantor Subsidiaries"). During 2001, the Company
adopted a policy for financial reporting purposes of allocating expenses to
subsidiaries. For the six months ended June 30, 2002, the Company allocated
total corporate expenses of $2.4 million to its subsidiaries. Additionally, the
Company charges interest on certain intercompany balances.
Because the LLC is not a minor subsidiary, the Company is providing
condensed consolidating financial information for the periods following the
Company's acquisition of the Hawesville facility. The Exchange Notes contain
customary covenants limiting the ability of both the Company and the Guarantor
Subsidiaries, to pay dividends, incur additional debt, make investments, sell
assets or stock of certain subsidiaries and purchase or redeem capital stock.
The following summarized condensed consolidating financial information as
of and for the six months ended June 30, 2002 and condensed consolidating
balance sheet as of December 31, 2001 presents separate results for Century
Aluminum Company, the Guarantor Subsidiaries and the Non-Guarantor Subsidiary.
This summarized condensed consolidating financial information may not
necessarily be indicative of the results of operations or financial position had
the Company, the Guarantor Subsidiaries or the Non-Guarantor Subsidiaries
operated as independent entities.
15
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Six Month Periods Ended June 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2001
Combined Combined
Guarantor Non-Guarantor The Reclassifications
Subsidiaries Subsidiaries Company and Eliminations Consolidated
------------ --------------- ---------- ----------------- ------------
Assets:
Cash and cash equivalents ................... $ 1,020 $ -- $ 12,368 -- $ 13,388
Accounts receivables, net ................... 48,365 -- 345 -- 48,710
Due from affiliates ......................... 50,722 838 366,855 (398,648) 19,767
Inventory ................................... 46,649 28,568 -- -- 75,217
Other current assets ........................ 7,395 98 1,329 (5,249) 3,573
------------ --------------- ---------- ----------------- ------------
Total current assets ................ 154,151 29,504 380,897 (403,897) 160,655
Investment in subsidiaries .................. 95,670 -- 208,419 (304,089) --
Property, plant and equipment, net .......... 424,653 878 475 -- 426,006
Intangible asset ............................ -- 146,002 -- -- 146,002
Due from affiliates - Less current portion .. 8,364 -- -- -- 8,364
Other non-current assets .................... 20,467 1,674 16,784 (3,246) 35,679
------------ --------------- ---------- ----------------- ------------
Total assets ....................... $ 703,305 $ 178,058 $ 606,575 $ (711,232) $ 776,706
============ =============== ========== ================= ============
Liabilities and shareholders' equity:
Accounts payable, trade ..................... $ 19,922 $ 22,472 $ -- $ -- $ 42,394
Due to affiliates ........................... 351,690 1,998 47,089 (398,576) 2,201
Industrial revenue bonds .................... -- 7,815 -- -- 7,815
Accrued and other current liabilities ....... 16,437 5,269 17,680 (5,321) 34,065
Accrued employee benefits costs - current
portion ..................................... 7,653 147 -- -- 7,800
------------ --------------- ---------- ----------------- ------------
Total current liabilities ........... 395,702 37,701 64,769 (403,897) 94,275
Long term debt - net ........................ -- -- 321,446 -- 321,446
Accrued Pension benefits Costs - less current
portion ..................................... 1,555 -- 2,462 -- 4,017
Accrued Postretirement Benefits Costs - less
current portion ............................. 45,008 20,619 -- -- 65,627
Other liabilities ........................... 9,833 151 713 -- 10,697
Deferred taxes .............................. 42,788 -- -- (3,246) 39,542
------------ --------------- ---------- ----------------- ------------
Total non-current liabilities ....... 99,184 20,770 324,621 (3,246) 441,329
Minority interest ........................... -- -- -- 23,917 23,917
Shareholders' Equity:
Convertible preferred stock ................. -- -- 25,000 -- 25,000
Common stock ................................ 59 -- 205 (59) 205
Additional paid-in capital .................. 226,996 139,281 168,414 (366,277) 168,414
Accumulated other comprehensive income ...... 6,752 -- 6,752 (6,752) 6,752
Retained earnings ........................... (25,388) (19,694) 16,814 45,082 16,814
------------ --------------- ---------- ----------------- ------------
Total shareholders' equity .......... 208,419 119,587 217,185 (328,006) 217,185
------------ --------------- ---------- ----------------- ------------
Total liabilities and equity ........ $ 703,305 178,058 $ 606,575 $ (711,232) $ 776,706
============ =============== ========== ================= ============
16
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Six Month Periods Ended June 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
As of June 30, 2002
Combined Combined
Guarantor Non-Guarantor The Reclassifications
Subsidiaries Subsidiaries Company and Eliminations Consolidated
------------ -------------- ---------- ----------------- ------------
Assets:
Cash and cash equivalents ................... $ 60 $ -- $ 20,123 -- $ 20,183
Accounts receivables, net ................... 49,832 243 -- -- 50,075
Due from affiliates ......................... 76,821 15,083 355,560 (429,464) 18,000
Inventory ................................... 54,923 20,625 -- -- 75,548
Other current assets ........................ 6,531 702 5,335 (5,097) 7,471
------------ -------------- ---------- ----------------- ------------
Total current assets ................ 188,167 36,653 381,018 (434,561) 171,277
Investment in subsidiaries .................. 85,167 -- 198,774 (283,941) --
Property, plant and equipment, net .......... 421,585 3,491 364 -- 425,440
Intangible asset ............................ -- 132,873 -- -- 132,873
Due from affiliates - Less current portion .. 3,544 -- -- -- 3,544
Other non-current assets .................... 18,497 -- 16,660 -- 35,157
------------ -------------- ---------- ----------------- ------------
Total assets ....................... $ 716,960 $ 173,017 $ 596,816 $ (718,502) $ 768,291
============ ============== ========== ================= ============
Liabilities and shareholders' equity:
Accounts payable, trade ..................... $ 11,100 $ 29,830 $ -- $ -- $ 40,930
Due to affiliates ........................... 44,149 -- 49,667 (78,583) 15,233
Industrial revenue bonds .................... -- 7,815 -- -- 7,815
Accrued and other current liabilities ....... 14,609 5,988 16,951 (5,167) 32,381
Accrued employee benefits costs - current
portion ..................................... 7,653 634 -- -- 8,287
------------ -------------- ---------- ----------------- ------------
Total current liabilities ........... 77,511 44,267 66,618 (83,750) 104,646
------------ -------------- ---------- ----------------- ------------
Long term debt - net ........................ -- -- 321,643 -- 321,643
Accrued Pension benefits Costs - less current
portion ..................................... 1,425 634 3,463 -- 5,522
Accrued Postretirement Benefits Costs - less
current portion ............................. 47,111 21,213 54 -- 68,378
Other liabilities/Intercompany loan ......... 358,947 444 -- (350,811) 8,580
Deferred taxes .............................. 33,191 -- 15 -- 33,206
------------ -------------- ---------- ----------------- ------------
Total non-current liabilities ....... 440,674 22,291 325,175 (350,811) 437,329
------------ -------------- ---------- ----------------- ------------
Minority interest ........................... -- -- -- 21,292 21,292
Shareholders' Equity:
Convertible preferred stock ................. -- -- 25,000 -- 25,000
Common stock ................................ 59 -- 206 (59) 206
Additional paid-in capital .................. 226,997 139,281 168,958 (366,278) 168,958
Accumulated other comprehensive income ...... 5,177 -- 5,177 (5,177) 5,177
Retained earnings ........................... (33,458) (32,822) 5,682 66,281 5,683
------------ -------------- ---------- ----------------- ------------
Total shareholders' equity .......... 198,775 106,459 205,023 (305,233) 205,024
------------ -------------- ---------- ----------------- ------------
Total liabilities and equity ........ $ 716,960 $ 173,017 $ 596,816 $ (718,502) $ 768,291
============ ============== ========== ================= ============
17
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Six Month Periods Ended June 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2002
Combined Combined Reclassifications
Guarantor Non-Guarantor The and
Subsidiaries Subsidiaries Company Eliminations Consolidated
------------ -------------- ---------- ----------------- ------------
Net sales:
Third-party customers ................ $ 302,576 $ -- $ -- $ -- $ 302,576
Related parties ...................... 56,860 -- -- -- 56,860
------------ -------------- ---------- ----------------- ------------
359,436 -- -- -- 359,436
Cost of goods sold ........................ 334,043 126,041 -- (112,912) 347,172
Reimbursement from owners ................. -- (113,006) -- 113,006 --
------------ -------------- ---------- ----------------- ------------
Gross profit (loss) ....................... 25,393 (13,035) -- (94) 12,264
Selling, general and administrative
expenses ............................... 7,938 -- -- -- 7,938
------------ -------------- ---------- ----------------- ------------
Operating income (loss) ................... 17,455 (13,035) -- (94) 4,326
------------ -------------- ---------- ----------------- ------------
Interest income (expense), net ............ (20,026) (66) -- 66 (20,026)
Other income (expense), net ............... (102) (28) -- 28 (102)
------------ -------------- ---------- ----------------- ------------
Income (loss) before taxes and
minority interest ...................... (2,673) (13,129) -- -- (15,802)
Income tax (expense) benefit .............. 1,117 -- -- 3,991 5,108
------------ -------------- ---------- ----------------- ------------
Net income (loss) before minority
interest ............................... (1,556) (13,129) -- 3,991 (10,694)
Minority interest ......................... -- -- -- 2,626 2,626
Equity earnings (loss) of subsidiaries .... (6,512) -- (8,068) 14,580 --
------------ -------------- ---------- ----------------- ------------
Net income (loss) ......................... $ (8,068) $ (13,129) $ (8,068) $ 21,197 $ (8,068)
============ ============== ========== ================= ============
18
CENTURY ALUMINUM COMPANY
Notes to Consolidated Financial Statements
Six Month Periods Ended June 30, 2002 and 2001
(Dollars in Thousands)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2002
Combined Combined
Guarantor Non-guarantor The Reclassifications
Subsidiaries Subsidiaries Company and Eliminations Consolidated
------------ -------------- ---------- ----------------- ------------
Net cash provided by operating
activities ............................... $ 10,839 $ 9,366 $ -- $ -- $ 20,205
------------ -------------- ---------- ----------------- ------------
Investing activities:
Purchase of property, plant and
equipment, net ....................... (8,336) (2,516) -- -- (10,852)
------------ -------------- ---------- ----------------- ------------
Net cash (used in) investing
activities ........................... (8,336) (2,516) -- -- (10,852)
------------ -------------- ---------- ----------------- ------------
Financing activities:
Dividends .............................. -- -- (2,563) -- (2,563)
Intercompany transactions .............. (3,463) (6,850) 10,313 -- --
Issuance of common or preferred stock .. -- -- 5 -- 5
------------ -------------- ---------- ----------------- ------------
Net cash provided by (used in) financing
activities ............................... (3,463) (6,850) 7,755 -- (2,558)
------------ -------------- ---------- ----------------- ------------
Net increase (decrease) in cash ............ (960) -- 7,755 -- 6,795
Cash, beginning of period .................. 1,020 -- 12,368 -- 13,388
------------ -------------- ---------- ----------------- ------------
Cash, end of period ........................ $ 60 $ -- $ 20,123 $ -- $ 20,183
============ ============== ========== ================= ============
19
FORWARD-LOOKING STATEMENTS - CAUTIONARY STATEMENT UNDER THE PRIVATE
SECURITIES REFORM ACT OF 1995.
This quarterly report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Words such as "expects,"
"anticipates," "forecasts," "intends," "plans," "believes," "projects," and
"estimates" and variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements include, but are not
limited to, statements regarding new business and customers, contingencies,
environmental matters and liquidity under "Part I, Item 2 - Management's
Discussion and Analysis of Financial Condition and Results of Operations," "Part
I, Item 3 - Quantitative and Qualitative Disclosures About Market Risk" and
"Part II, Item 1 Legal Proceedings." These statements are not guarantees of
future performance and involve risks and uncertainties and are based on a number
of assumptions that could ultimately prove to be wrong. Actual results and
outcomes may vary materially from what is expressed or forecast in such
statements. Among the factors that could cause actual results to differ
materially are general economic and business conditions, changes in demand for
the Company's products and services or the products of the Company's customers,
fixed asset utilization, competition, the risk of technological changes and the
Company's competitors developing more competitive technologies, the Company's
dependence on certain important customers, the availability and terms of needed
capital, risks of loss from environmental liabilities, and other risks detailed
in this report. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. The following information should be read in conjunction
with the Company's 2001 Form 10-K along with the consolidated financial
statements and related footnotes included within the Form 10-K.
20
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The following discussion reflects Century's historical results of
operations, which do not include results for the Company's 80% interest in the
Hawesville facility until it was acquired in April 2001.
Century's financial highlights include (in thousands, except per share
data):
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net sales
Third-party customers ............. $ 148,377 $ 159,128 $ 302,576 $ 243,218
Related party customers ........... 31,959 29,791 56,860 56,391
---------- ---------- ---------- ----------
Total ................................ $ 180,336 $ 188,919 $ 359,436 $ 299,609
========== ========== ========== ==========
Net income (loss) .................... $ (4,600) $ 1,343 $ (8,068) $ 4,494
Net income (loss) available
to common shareholders ............ $ (5,100) $ 843 $ (9,068) $ 3,994
Earnings (loss) per share - basic .... $ (0.25) $ 0.04 $ (0.44) $ 0.20
Net sales. Net sales for the three months ended June 30, 2002 decreased
$8.6 million or 4.5% to $180.3 million from $188.9 million for the same period
in 2001. This decrease was primarily the result of lower market price of
aluminum of $14.0 million, which was partially offset by $5.4 million due to
higher shipment volume. Net Sales for the six months ended June 30, 2002
increased $59.8 million or 20.0% to $359.4 million from $299.6 million for the
six months ended June 30, 2001. The increase was primarily the result of the
acquisition of the Hawesville facility on April 1, 2001, of $89.7 million,
which was partially offset by lower market prices for primary aluminum of $29.9
million.
Gross profit. Gross profit for the three months ended June 30, 2002
decreased $8.8 million to $5.0 million from $13.8 million for the three months
ended June 30, 2001. The decrease was primarily the result of lower market
prices for primary aluminum. Cost of goods sold increased slightly due to
increased sales volume, an unfavorable lower of cost or market inventory
adjustment and higher depreciation expense for the period, offset by lower
average production cost of metal and reduced raw material costs. For the six
months ended June 30, 2002, gross profit decreased $9.9 million to $12.3 million
from $22.2 million for the same period in 2001. The decrease is primarily due to
higher depreciation and amortization expense, primarily related to the
Hawesville facility, partially offset by a lower of cost or market inventory
reversal.
21
Selling, general and administrative expenses. Selling, general and
administrative expenses for the three months ended June 30, 2002 increased $1.0
million to $3.8 million from $2.8 million for the three months ended June 30,
2001. Selling, general and administrative expenses increased primarily due to
increased legal and accounting expenses between periods. For the six months
ended June 30, 2002, selling, general, and administrative expenses increased
$1.5 million to $7.9 million from $6.4 million for the six months ended June 30,
2001. Selling, general and administrative expenses as a percentage of revenue
increased slightly to 2.2% for the six months ended June 30, 2002 from 2.1% for
the six months ended June 30, 2001.
Operating income or loss. Operating income for the three months ended June
30, 2002 decreased $9.8 million to $1.2 million from $11.0 million for the three
months ended June 30, 2001. Operating income decreased for the reasons discussed
above. For the six months ended June 30, 2002 operating income decreased $11.5
million to $4.3 million from $15.8 million for the six months ended June 30,
2001. The decrease is due to the reasons discussed above.
Interest Expense. Interest expense during the three months ended June 30,
2002 decreased $0.9 million to $9.9 million from $10.8 million for the three
months ended June 30, 2001. The change in interest expense was primarily due to
capitalized interest for capital projects in 2002. For the six months ended June
30, 2002 interest expense increased $9.7 million to $20.2 million from $10.5
million for the six months ended June 30, 2001. The increase was primarily due
to borrowing required to fund the acquisition of the Hawesville facility in
April 2001.
Interest Income. Interest income during the three months ended June 30,
2002 decreased $375 to $58 from $433 for the three months ended June 30, 2001.
For the six months ended June 30, 2002 interest income decreased $420 to $129
from $549 for the six months ended June 30, 2001. The change in interest income
was a result of using available cash to fund the Hawesville acquisition in April
2001.
Tax Provision/Benefit. Income tax benefit for the three months ended June
30, 2002 increased $3.5 million to $2.9 million from an expense of $0.6 million
for the three months ended June 30, 2001. For the six months ended June 30, 2002
income tax benefit increased $7.5 million to an income tax benefit of $5.1
million from an income tax expense of $2.4 million for the six months ended June
30, 2001. The change in income taxes was a result of a pre-tax loss in the three
and six months ended June 30, 2002 compared to pre-tax income in the three and
six months ended June 30, 2001.
Minority Interest. Minority Interest reflects Glencore's interest in the
net operating results of Century Aluminum of Kentucky, LLC, which consists of
amortization of the power contract. The limited liability company holds the
power contract for the Hawesville facility, among other assets and liabilities.
Net Income or loss. The Company had a net loss of $4.6 million and $8.1
million during the three and six months ended June 30, 2002, respectively,
compared to net income of $1.3 million and $4.5 million for the three and six
months ended June 30, 2001, respectively. The reason for the change in
profitability are discussed above.
22
Liquidity and Capital Resources
The Company's statements of cash flows for the six months ended June 30,
2002 and 2001 are summarized below (dollars in thousands):
Six months ended
June 30,
2002 2001
---------- ----------
Net cash provided by operating activities ............ $ 20,205 $ 25,089
Net cash used in investing activities ................ (10,852) (370,824)
Net cash provided by (used in) financing
activities ........................................... (2,558) 328,126
---------- ----------
Increase (decrease) in cash .......................... $ 6,795 $ (17,609)
========== ==========
Operating activities generated $20.2 million during the first six months
of 2002 primarily as a result of operating cash flow from the Hawesville and
Berkeley operations. Operating activities generated $25.1 million in net cash
during the first six months of 2001 as the result of increases in operating
income, reductions in inventory and increases in accrued liabilities which were
partially offset by increases in accounts receivable and reductions in trade
payables.
The Company's net cash used for investing activities was $10.9 million
during the first six months of 2002. The cash was used for capital expenditures
to purchase, modernize, and/or upgrade production equipment, maintain facilities
and comply with environmental regulations. The Company's net cash used in
investing activities was $370.8 million during the first six months of 2001. The
cash was used primarily for the acquisition of the Hawesville facility and was
partially offset by the proceeds from the sale to Glencore of the minority
interest in the Hawesville facility.
Net cash used in financing activities during the first six months of 2002
was used to fund common and preferred stock dividend payments. The Company's net
cash provided from financing activities during the first six months of 2001 was
$328.1 million. The cash from financing activities was primarily from borrowing
and issuance of preferred stock related to the acquisition of the Hawesville
facility.
Environmental Expenditures and Other Contingencies
The Company has incurred and in the future will continue to incur capital
expenditures and operating expenses for matters relating to environmental
control, remediation, monitoring and compliance. The aggregate environmental
related accrued liabilities were $2.0 million and $1.8 million at June 30, 2002
and December 31, 2001, respectively. The Company believes that compliance with
current environmental laws and regulations is not likely to have a material
adverse effect on the Company's financial condition, results of operations or
liquidity; however, environmental laws and regulations may change, and the
Company may become subject to more stringent environmental laws and regulations
in the future. There can be no assurance that compliance with more stringent
environmental laws and regulations that may be
23
enacted in the future, or future remediation costs, would not have a material
adverse effect on the Company's financial condition, results of operations or
liquidity.
The Company is a defendant in several actions relating to various aspects
of its business. While it is impossible to predict the ultimate disposition of
any litigation, the Company does not believe that any of these lawsuits, either
individually or in the aggregate, will have a material adverse effect on the
Company's financial condition, results of operations or liquidity. See Note 5 of
the financial statements contained herein.
Pechiney Rolled Products, Inc., Century of West Virginia's principal customer,
has publicly announced it is experiencing financial losses and that it is
considering various alternatives to address its losses, including restructuring.
If a restructuring should be undertaken, it could have a material adverse effect
on the Company. No provision for loss has been made because a loss is not
probable.
New Accounting Standards
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This Statement establishes standards for accounting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard is required to be adopted by the
Company beginning January 1, 2003. The Company is currently assessing the
details of this standard and is developing a plan for implementation.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Commodity Prices
The Company manages its exposure to fluctuations in the price of primary
aluminum by selling aluminum at fixed prices for future delivery and through
financial instruments as well as by purchasing alumina under supply contracts
with prices tied to the same indices as the Company's market-based aluminum
sales contracts. The Company's risk management activities do not include trading
or speculative transactions. Although the Company has not materially
participated in the purchase of call or put options, in cases where Century
sells forward primary aluminum, it may purchase call options to benefit from
price increases, which are significantly above forward sales prices. In
addition, it may purchase put options to protect itself from price decreases.
The Company was party to a long-term supply agreement with Alcoa to
purchase alumina through the end of 2006. The contract was unpriced from 2002
through 2006. The Company negotiated pricing with both Alcoa and Glencore which
resulted in a more competitive agreement with Glencore. The new long-term supply
agreements with Glencore, which replaced the Alcoa alumina agreement, will
extend through 2006. These agreements provide for a fixed quantity of alumina at
prices determined by a market-based formula. In addition, as part of its
acquisition of an additional 23% interest in the Mt. Holly Facility, the Company
assumed a supply agreement with Glencore for the alumina raw material
requirements relative to the additional interest. The unit cost is also
determined by a market-based formula. This alumina supply agreement terminates
in 2008. As part of its Hawesville acquisition, the Company assumed an alumina
supply agreement with Kaiser. That agreement will terminate in 2005 and is a
variable priced market based contract.
24
At June 30, 2002, the Company had entered into 207.5 million pounds of
fixed priced forward primary aluminum financial sales contracts primarily with
the Glencore Group to mitigate the risk of commodity price fluctuations inherent
in its business. These contracts will be settled in cash at various dates during
2002 and 2003. Additionally, in order to mitigate the volatility of the natural
gas markets, the Company enters into fixed price forward financial purchase
contracts, which settle in cash in the period corresponding to the intended
usage of natural gas. At June 30, 2002, the Company had financial instruments
for 2.3 million DTH (one decatherm, or DTH, is equivalent to one million British
Thermal Units). These financial instruments are scheduled for settlement at
various dates in 2002 through 2005.
On a hypothetical basis a $0.01 per pound increase or decrease in the
market price of primary aluminum is estimated to have an unfavorable or
favorable impact of $1.3 million after tax, respectively, on accumulated other
comprehensive income for the six months ended June 30, 2002 as a result of the
forward primary aluminum financial sale contracts entered into by the Company at
June 30, 2002.
On a hypothetical basis, a $0.50 per DTH decrease or increase in the
market price of natural gas is estimated to have an unfavorable or favorable
impact of $0.7 million after tax, respectively, on accumulated other
comprehensive income for the six months ended June 30, 2002 as a result of the
forward natural gas financial purchase contracts entered into by the Company at
June 30, 2002.
Century monitors its overall position, and its metals and natural gas risk
management activities are subject to the management, control and direction of
senior management. These activities are regularly reported to the Board of
Directors of Century.
This quantification of the Company's exposure to the commodity price of
aluminum is necessarily limited, as it does not take into consideration the
Company's inventory or forward delivery contracts, or the offsetting impact upon
the sales price of primary aluminum products. Because all of the Company's
alumina contracts are indexed to the LME price for aluminum beginning in 2002,
they act as a natural hedge for approximately 25% of the Company's production.
Entering the year 2002, approximately 48% and 55% of the Company's production
for the years 2002 and 2003, respectively, was either hedged by the alumina
contracts or by fixed price forward delivery and financial sales contracts.
Interest Rates
Interest Rate Risk. The Company's primary debt obligations are the
outstanding Exchange Notes, borrowings under its revolving credit facility and
the industrial revenue bonds the Company assumed in connection with the
Hawesville acquisition. Because the Exchange Notes bear a fixed rate of
interest, changes in interest rates do not subject the Company to changes in
future interest expense with respect to the outstanding notes. Borrowings under
the Company's revolving credit facility, if any, are at variable rates at a
margin over LIBOR or the Fleet National Bank base rate, as defined in the
revolving credit facility. The industrial revenue bonds bear interest at
variable rates determined by reference to
25
the interest rate of similar instruments in the industrial revenue bond market.
At June 30, 2002, the Company had $7.8 million of variable rate borrowings. A
hypothetical 1% increase in the interest rate would increase the Company's
annual interest expense by $0.1 million, assuming no debt reduction.
26
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Stockholders -
At the annual meeting of Century Aluminum Company stockholders held on June 25,
2002, Craig A. Davis and William R. Hampshire were re-elected as directors of
Century Aluminum Company to serve for three-year terms. Votes cast for Mr. Davis
were 17,758,038 and votes withheld were 1,690,854, and votes cast for Mr.
Hampshire were 19,326,660 and votes withheld were 122,232.
Additionally, a proposal to ratify the appointment of Deloitte & Touche LLP as
the Company's independent auditor for the fiscal year ending December 31, 2002
was approved. Total votes cast for the proposal were 18,895,116, votes cast
against were 549,239 and there were 4,537 abstentions.
Item 6. Exhibits and Reports on Form 8-K.
Exhibit
Number Description
------- -----------------------------------------------------------------------
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Century Aluminum Company
Date: August 14, 2002 By: /s/ Craig A. Davis
----------------- ----------------------------------------
Craig A. Davis
Chairman/Chief Executive Officer
Date: August 14, 2002 By: /s/ David W. Beckley
----------------- ----------------------------------------
David W. Beckley
Executive Vice-President/Chief Financial
Officer
28